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Luxtera: The Long Road to Success

2018 was already a good year for silicon photonics, but managed to end on a high note with Cisco announcing its intent to buy privately held silicon photonics vendor Luxtera in a deal worth $660 million in cash and assumed equity rewards.

Luxtera is one of the optical industry’s oldest start-ups, founded in 2001 by a group of entrepreneurs out of Caltech in the U.S. Their ambition was to deliver the next generation of high-speed optical components at scale using manufacturing methods borrowed from the microelectronics industry. The company focused on automation, not just in the foundry, but also in test and packaging. And they have delivered: in late 2016, the company said it had shipped more than one million optical transceiver products in the 100G PSM4 format aimed at hyperscale data centers. In terms of shipments (Figure 1), Luxtera has become a significant player in the silicon photonics space.

Figure: Sales of optical transceivers based on silicon photonics

Source: LightCounting, Integrated Optical Devices, May 2018

The start-up’s founders and investors took a long-term view on yet-to-be-proven technology, but have been handsomely rewarded for their vision and persistence. Luxtera has raised about $130 million in venture capital since it was founded; investors must be very happy with the company’s $660 million exit.

“From government funded academic research to early commercial deployment to global scale, Luxtera is a case study in taking an already difficult path and proving naysayers wrong,” said Peter Hébert, managing partner of investor Lux Capital, in a blog post on medium.com.

That vision and persistence will find a good match at Cisco, which threw a spotlight on the potential of silicon photonics when it purchased Lightwire for $271 million in 2012. Assuming the purchase of Luxtera is consummated, Cisco will have invested more in silicon photonics technology than any other player – even the U.S. Government.

For comparison, the American Institute of Manufacturing Integrated Photonics (AIM Photonics), has attracted around $600 million of investment to develop a national photonics platform. The U.S. Department of Defense is investing $110 million over five years supported by a consortium of dozens of industry partners, universities and trade associations.

Although manufacturing initiatives like AIM Photonics in the U.S. are intended to lower barriers to commercializing integrated photonics technology, this kind of industrial transformation does not happen overnight. Including the Luxtera acquisition, Cisco will have invested close to one billion dollars while Luxtera acknowledged in a press release that they have invested more than $250 million to develop silicon photonics technology. This underscores the fact that companies still need a lot of cash to play in the silicon photonics space. Indeed, Mellanox – which had purchased Kotura – curtailed its 1550nm silicon photonics activities in 2017 as shareholders were not prepared to stay the course.

Nevertheless, progress in SiP technology is encouraging. Sales of optical transceivers based on SiP components doubled in 2015 and 2016 before settling down to a more moderate rate of growth: 22% in 2017, according to LightCounting’s report on Integrated Optical Devices, published in May 2018. Contrary to expectations for an abrupt market disruption, our analysis suggests that SiP technology will gain market share gradually, with sales reaching $2.4 billion by 2023.

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LightCounting releases a new report addressing illumination in smartphones and automotive lidarIn 2019, the market for VCSEL (vertical cavity surface-emitting laser) illumination in smartphones will exceed $1.0 billion – now nearly triple the size of the market for communications VCSELs. That’s quite remarkable for a market that didn’t exist three years ago.3D sensing in smartphones felt like an overnight sensation, but the technology foundations were laid down years ago with Microsoft’s Kinect – a motion-sensing peripheral for gamers released in 2010 but discontinued in 2017 after lackluster sales. Lumentum supplied lasers to the Kinect almost a decade before the iPhone opportunity emerged; the company was ready to profit from the iPhone X opportunity when Apple decided to launch 3D sensing for facial recognition in September 2017.

Figure: 3D depth-sensing meets the Gartner Hype Cycle

Source: Gartner with edits by LightCounting

If all technologies follow the Gartner Hype Cycle, shown in the Figure above, then 3D sensing in smartphones is now moving up the slope of enlightenment. Android brands raced to add 3D sensing to their flagship phones in 2018 – the Xiaomi Mi8 Explorer and Oppo Find X phones were first – although these only sold in single digit million quantities. Huawei also brought out new phones with 3D sensing, but the ongoing U.S. export ban on the Chinese company must be hurting the company’s traction outside China. Apple continues to dominate the market as all new iPhones released by Apple since 2017 have included 3D sensing on the front of the phone. Apple is expected to introduce 3D sensing for ‘world-facing’ applications in 2020, which adds another laser chip to every phone.

Last year illumination for lidars were not included in our market forecast since LightCounting considered it unlikely that lidar would penetrate the consumer market to any great extent over the forecast period. All indicators now point to a market for lidar illumination ramping up in 2022 and beyond. Optical components firms are now shipping prototypes and samples of VCSELs, edge emitters and coherent lasers to customers developing next-generation lidar systems – many of them building on their expertise in illumination for optical communications and smartphones.

As was the case with smartphones, the foundations for lidar technology were laid down much earlier – in this case with the DARPA Challenge 2007, where the winning vehicle used a 64-laser lidar system from Velodyne Acoustics (now Velodyne Lidar). Lidar is considered by the majority of the industry to be an essential part of the sensor suite required for autonomous driving, helping the vehicle to navigate through the environment and detect obstacles in its path. The first commercial deployments have begun. In Germany, lidar on the Audi A8 enables the car to drive itself for limited periods under specific conditions. In Phoenix, Arizona, you can hail a ride in a Waymo robotaxi.

Investor enthusiasm for lidar is undeniable with nearly half a billion dollars invested in lidar start-ups in 2019 according to our analysis of publicly available investment data. Notable deals include $60 million for U.S. company Ouster in March, Israel’s Innoviz Technologies Series C round of $132 million in the same month, and $100 million for U.S.-based Luminar Technologies in July. Interestingly, these examples illustrate the variety of lidar approaches: each company is building a different type of lidar based on a different wavelength: 850nm for Ouster, 905nm for Innoviz and 1550nm in the case of Luminar. There’s an open technology battle and they can’t all be winners.

The automotive lidar market seems to be close to the peak of ‘inflated expectations’. It’s easy to understand why. The automotive industry is enormous, with nearly 100 million vehicles (including trucks) produced annually. Players like Baidu, GM Cruise and Waymo are backed by deep corporate pockets, and new entrants like Aurora and Pony.ai are attracting hundreds of millions in investment. Intel’s $15.3 billion purchase of Mobileye in 2017 was also directed at autonomous driving. Sensor company AMS is in a $4.8 billion battle to acquire German semiconductor lighting firm Osram with its eye firmly on lidar.

However, signs indicate that the descent into the trough of disillusionment could have already begun. Waymo has yet to roll out its robotaxi services more widely – and this summer admitted that its vehicles needed more testing in the rain. GM Cruise has delayed launch of commercial services for self-driving cars beyond 2019 and is reluctant to commit to a new timescale, with its CEO Dan Ammann observing that safety is paramount; automotive is not an industry where you can “move fast and break things” he said. A casualty of the slow pace was optical phased array lidar developer Oryx Vision, which closed its doors in August and started to hand money back to investors.

While lidar is being deployed commercially today, prices are not conducive to mass production, and there are open questions around regulation, safety, ethics and consumer acceptance. Do local laws prohibit self-driving cars? Will they really be safer than humans? Who is responsible for a crash? LightCounting remains skeptical about the pace of adoption of autonomous vehicles, but will be watching the market closely and with optimism.